The Effect of Internal Control on the Detection and Prevention of Fraud in Commercial Banks Case of NFC Bank Buea Branch
Department: Accounting
No of Pages: 58
Project Code: ACC5
References: Yes
Cost: 5,000XAF Cameroonian
: $15 for International students
ABSTRACT
Fraud
has been in existence throughout history and has taken many different
dimensions thus Internal controls are designed to detect fraud before it’s too
late.
This
study sought out to examine the effect of internal control on fraud detection
and prevention, furthermore this study employed case study design with a total
population size of 15 staff of NFC bank Buea Branch.
Purposive
sampling technique used with the help of questionnaire. The study used primary
data. An ordinary linear regression model was used. The regressions were
conducted using statistical package for social sciences (SPSS) version 21.
The
results of the study revealed that that appropriate measures are taken to
correct misfeasance in operation of Accounting & Finance Management System,
NFC Bank Buea institution has clear separation of roles, there are elaborate
mechanisms put in place to address weaknesses of controls, the banks security
system identifies and safeguard Institutional Assets.
The
study concluded that internal control positively and significantly affects the
detection and prevention of fraud in commercial banks case of NFC Bank Buea
branch. The study sought to see if there exist a significant effect between
internal control and detection and prevention of fraud in commercial banks, and
from the findings, we conclude that there is a significance between the two
variables, thus, we reject the null hypothesis.
This
study recommends that Serious sanction should be given and implemented on
individuals found carrying out fraudulent transaction in the bank, this
sanction can go a long way to limit the occurrences of frauds in banks
CHAPTER ONE
INTRODUCTION
1.1 Introduction
Internal
controls are processes designed to provide reasonable assurance that management
achieves effectiveness and efficiency of operations, reliability of financial
reporting and compliance with applicable laws and regulations (Grant, Miller,
& Alali, 2008).
A
system of internal controls potentially prevents errors and fraud through
monitoring and enhancing organizational and financial reporting processes as
well as ensuring compliance with pertinent laws and regulations (Rae and
Subramanian, 2008).
Reasonable
assurance is provided when cost effective actions are taken to restrict
deviations, such as improper or illegal acts to a tolerable level. The internal
audit reviews the effectiveness of the internal control system to ascertain
whether the system is functioning as intended (Fadzil, Haron & Jantan,
2005).
Internal
controls are designed to detect fraud before it’s too late (Firozababdi, Tan
& Lee, 1999). This is simply true because when fraud happens, all that
could be lost is lost. However, making sure that fraud does not happen in the
first place is the responsibility of the bank managers (Weygtandt et al.,
2010).
Although
fraud is being bad for the business and its prevention a must for every banker,
fraud is happening regardless (Olatunji, 2009).
The
system of internal controls should emphasize on, proper identification
measurement and monitoring of risks, control activities for each level of
operation, creation of reliable information systems that promptly reports
anomalies and detailed reporting of all operations and monitoring of all the
activities (Opromolla & Maccarini, 2010).
Internal controls are affected by a company’s
board of directors, management and other personnel and are designed to ensure
effectiveness and efficiency of operations, reliability of financial reporting
and compliance with applicable laws and regulations (Spira & Page, 2003).
The management should assess and report the effectiveness of an institution’s
internal controls to its stakeholders (Rezaee, 1995).
Internal controls should have the following as its components, control environment, risk assessment, control activities, information and communication and monitoring activities (Basel Committee, 2011). These interrelated components of internal control must be present and functioning properly in order to have an adequate and functioning internal control system (Rezaee, 1995).
Fraud
has been in existence throughout history and has taken many different
dimensions. Bank fraud has grown with advent of the banking industry, and has
been facilitated by the technological innovations and the widespread use of the
Internet.
According
to the fraud triangle (Cressey, 2003) for fraud to occur the three factors;
pressure, rationalization and opportunity should be present. Bank employees
have knowledge of the systems as well as classified and confidential
information which together with technological advancement can give them the
opportunity to commit frauds.
All
they need is some pressure and the rationalization and that way they become
part of fraud cartels that are fleecing millions of shillings from the banks.
Effective
Internal control systems are crucial in detecting and preventing fraud. The
converse where nonexistence and ineffectiveness of internal controls do not
facilitate fraud detection and prevention is also true (MicroSave, 2007).
A
June 2003 publication by the Institute of Internal Auditors wrote that “risk
and control are virtually inseparable like two sides of a coin meaning that
risks first must be identified and assessed; then managed and mitigated by the
implementation of a strong system of internal control”.
The
goals of financial institutions are to enhance growth, profitability and
sustainability, that is, to actually achieves their mission, and minimizes the
risk of loss or failure in the process of conducting business.
To
fulfil their mission, financial institutions risks must be managed through
effective internal controls. This implies that internal control systems play a
positive role in the growth, profitability and sustainability of financial institutions
(Njagi, 2009; Kiprop, 2010).
It
is clear from the above that internal control is a fundamental component in any
institution and this study seems to throw more lights on how internal control
policies aid the operational processes of banking institutions in Cameroon.
1.2 Problem Statement
Although
banks try to watch out for frauds and prevent them from occurring, there are
still fraudsters out there stealing customer money by avoiding all measures
taken to prevent them from occurring (Olatunji, 2009).
Meanwhile
banks in Cameroon are now opening to the world and introducing ATM machines and
cash withdrawal facilities including debit and credit cards which have
international access. These facilities are known to attract fraudsters in
droves (Levi, 2000) which Somali banks even more susceptible for a fraud to occur.
Thus,
a study is required to investigate how banks internal controls, specifically
control activities can help fraud detection in the Somali banks. The regularity
of fraud and misappropriation of funds is creating fear, anxiety, and a loss of
confidence in the minds of bank customea rs.
In
addition, poor internal control system leads to increase in bank losses (ACFE,
2010). Management is required to set up an internal control system but this
system varies significantly from one organization to the next, depending on
such factors as their size, nature of operations, and objectives.
Since
internal controls operate in an environment, which influences its operations,
proper care must be exerted into the implementation of these systems in other
to achieve the utmost aim of the bank. This heightened interest in internal
controls is, in part, a result of significant losses incurred by several
banking organizations (Hochberg, Sapienza & Jorgensen, 2009).
An
analysis of the problems related to these losses indicates that they could
probably have been avoided had the banks maintained effective internal control
systems. Such systems would have prevented or enabled earlier detection of the
problems that led to the losses, thereby limiting damage to the banking
organization (Levi, 2008).
Little
or no sufficient work has been carried out in Cameroon on the effect of
internal control on fraud detection and prevention in the banking industry. Thus,
this work will seek to investigate the effect of internal control on fraud
detection and prevention in commercial bank in Cameroon.
1.3 Research Objectives
- The main research objective was to investigate the effect of internal controls on fraud detection and prevention in commercial banks. Case study of NFC Buea.
1.3.1 Specific Research
Objectives
- To establish the effect of control activities the level of fraud prevention and detection in commercial banks case study of NFC Buea.
- To determine the effect of control environment on the level of fraud prevention and detection in case study of NFC Buea.
- To investigate the effect of monitoring on the level of fraud prevention and detection in commercial banks case study of NFC Buea.
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